SUPREME COURT OF APPEAL OF SOUTH AFRICA …

1 SUPREME COURT OF APPEAL OF SOUTH AFRICA JUDGMENT Case No: 132/11 Reportable In the matter between: COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE Appellant and TRADEHOLD LTD Respondent Neutral citation: Commissioner for the SOUTH African Revenue Service v Tradehold Ltd (132/11) [2012] ZASCA 61 (8 MAY 2012) Coram: NUGENT, CACHALIA, MALAN, TSHIQI JJA and BORUCHOWITZ AJA Heard: 12 March 2012 Delivered: 8 May 2012 Summary: Income tax s 12 of Eighth Schedule of Act 58 of 1962 deemed disposal of assets Double Tax Agreement between the Republic of SOUTH AFRICA and Luxembourg meaning of and effect Article 13(4) includes within its ambit capital gains derived from the alienation of all property including a deemed disposal of assets.

2 2 _____ ORDER _____ On APPEAL from: The Tax COURT , Cape Town (Griesel J): The APPEAL is dismissed with costs, including those of two counsel. _____ JUDGMENT _____ BORUCHOWITZ AJA (NUGENT, CACHALIA, MALAN and TSHIQI JJA concurring) [1] This is an APPEAL by the Commissioner for the SOUTH African Revenue Service from a decision of the Tax COURT , Cape Town (Griesel J). The respondent, Tradehold Limited (Tradehold), had successfully appealed against an additional assessment raised by the Commissioner based on a taxable capital gain which, according to the Commissioner, arose from a deemed disposal by Tradehold of its shares in Tradegro Holdings Limited, in terms of para 12(1) of the Eighth Schedule to the Income Tax Act 58 of 1962 (the Act).

3 [2] Tradehold is an investment holding company, incorporated in SOUTH AFRICA , with its registered office at 36 Stellenberg Road, Parow, Industria, and is listed on the Johannesburg Stock Exchange. During the tax year under consideration, being the year of assessment ended 28 February 2003, Tradehold s only relevant asset was its 100 per cent shareholding in Tradegro Holdings which, in turn, owned 100 per cent of 3 the shares in Tradegro Limited, a company incorporated in Guernsey which owned approximately 65 per cent of the issued share capital in the UK-based company, Brown & Jackson plc. [3] On 2 July 2002, at a meeting of Tradehold s board of directors in Luxembourg, it was resolved that all further board meetings would be held in that country.

4 This had the effect that, as from 2 July 2002, Tradehold became effectively managed in Luxembourg. It nevertheless remained a resident in the Republic notwithstanding the relocation of the seat of its effective management to Luxembourg by reason of the definition, at that time, of the term resident in s 2 of the This status changed with effect from 26 February 2003, when the definition was amended and Tradehold ceased to be a resident of the [4] Relying on the provisions of para 12 of the Eighth Schedule to the Act, the Commissioner contended that when the respondent relocated its seat of effective management to Luxembourg on 2 July 2002, or when it ceased to be a resident of the Republic on 26 February 2003, it was deemed to have disposed of its only relevant asset, namely its 100 per cent shareholding in Tradegro Holdings, resulting in a capital gain being 1 Prior to its amendment and during the period 2 July 2002 to 25 February 2003, the term resident was defined as follows in s 1 of the Act.

5 Section 1 Resident means any (a) natural person who is .. (b) person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic (but excluding any international headquarter company).. 2 The amendment on 26 February 2003 added the following words to the definition of resident : [B]ut does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between Governments of the Republic and that other country for the avoidance of double taxation. 4 realised in the 2003 year of assessment in an amount of R405 039 083.

6 This tax is colloquially referred to as an exit tax . [5] Paragraph 12 of the Eighth Schedule to the Act, insofar as it is relevant, reads: 12 Events treated as disposals and acquisitions (1) Where an event described in subparagraph (2) occurs, a person will be treated for the purposes of this Schedule as having disposed of an asset described in that subparagraph for proceeds equal to the market value of the asset at the time of the event and to have immediately reacquired the asset at an expenditure equal to that market value, which expenditure must be treated as an amount of expenditure actually incurred and paid for the purposes of paragraph 20(1)(a).

7 (2) Subparagraph (1) applies, in the case of (a) a person who ceases to be a resident, or a resident who is as a result of the application of any agreement entered into by the Republic for the avoidance of double taxation treated as not being a resident, in respect of all assets of that person other than assets in the Republic listed in paragraph 2(1)(b)(i) and (ii); (b) an asset of a person who is not a resident, which asset (i) becomes an asset of that person s permanent establishment in the Republic otherwise than by way of acquisition; or (ii) ceases to be an asset of that person s permanent establishment in the Republic otherwise than by way of a disposal contemplated in paragraph [6] Paragraph 12 must be read with para 2 of the Eighth Schedule which provides: Application.

8 (1) Subject to paragraph 97, this Schedule applies to the disposal on or after valuation date of (a) any asset of a resident; and (b) the following assets of a person who is not a resident, namely (i) immovable property situated in the Republic held by that person or any interest or right of whatsoever nature of that person to or in immovable property situated in the Republic; or 5 (ii) any asset which is attributable to a permanent establishment of that person in the Republic. [7] Para 12(1) speaks of a person being treated as having disposed of an asset . This is a deeming provision. A deemed disposal of assets, except those listed in subsection 2(1)(b)(i) and(ii), is triggered under para 12 when a company ceases to be a resident of the Republic or is treated as not being a resident as a result of the application of a double tax agreement.

9 [8] On APPEAL to the Tax COURT it was contended by the respondent that if there was a deemed disposal of the investment by Tradehold during the 2003 year of assessment, the capital gain that resulted from that disposal was not taxable in SOUTH AFRICA but in Luxembourg. The reason therefore was that at the time the capital gain arose the respondent was deemed to be a resident of Luxembourg in terms of Art 4(3) of the Double Tax Agreement (DTA) entered into between SOUTH AFRICA and the Government of the Grand Duchy of Luxembourg on 6 December 2000, which became applicable to SOUTH AFRICA in respect of the years of assessment beginning on or after 1 January In terms of Art 4(3) the deemed place of residence of a company is the place where its effective management is situated.

10 3 Article 4 insofar as it is relevant provides as follows: 1. For the purposes of this Convention the term resident of a Contracting State means: (a) in Luxembourg, any person who, under the laws of Luxembourg, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, but this term does not include any person who is liable to tax in Luxembourg in respect only of income from sources in Luxembourg or capital situated therein; (b) in SOUTH AFRICA , any individual who is ordinarily resident in SOUTH AFRICA and any other person which has its place of effective management in SOUTH AFRICA ; and (c).